Episode 47: Benefits of Blockchain

Announcer: This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

Tom Wheelwright: Welcome to The WealthAbility® Show where we're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility®. Very excited about our show today because today we're going to talk about the next big disruptor in the finance and business world, and it's something that most of us probably have very little idea about.

 

Tom Wheelwright: So today we have an expert and we're going to discover, we're going to do it together, how do you use blockchain technology to our benefit. So I'm very, very excited about this because I think blockchain has huge potential, particularly in my industry as a CPA, but certainly in the finance, real estate, and other industries, and we have a very much an expert. What I love is Stephen Williams is not just an expert in blockchains, he's an expert in how to explain blockchain because he wrote a book about explaining blockchain. So very excited to have … Stephen, very excited to have you on the show. Would you give us just a little bit of why blockchain for you? Because this is fundamentally … as I understand it, you're a writer, so why blockchain?

 

Stephen W.: Yeah. Well, thanks for having me on your show. I really appreciate it, and I love talking about blockchain. The way I got into it was I went back to school a few years ago to get an MBA in sustainability, then one of my first classes I read the word blockchain in a paper I was reading, and it intrigued me and I went home and started reading about it and kind of fell down the rabbit hole because it seemed like technology with such vast potential to transform business and society. It was just one of those really exciting moments where you find something that's intellectually stimulating that you think could be really practical too. So I kept reading about it. That's how I got into blockchain.

 

Tom Wheelwright: So if you would, blockchain is this word we hear all the time. We hear it mostly in connection with Bitcoin and other cryptocurrencies. Can you explain, just a simply as possible, what is blockchain?

Stephen W.: Well, think of those old green ledger books that maybe your grandparents used to record their expenses for their business or their home where there was different columns, and you would enter what you sold, what you buy, interest earned, all kinds of information. Blockchain is basically one of those books digitized and done in a way so that it's completely secure and once you make an entry it can't be changed. You can modify the entry later on by making an addendum to it, but you can't change the information. So it's immutable information, which turns out to be a very valuable thing in our world.

 

Tom Wheelwright: Well, I can certainly say in my world when I see somebody and they'll send me their books and then a month later they'll send me the same period, but it will be different. The idea of something immutable where they have to do a journal entry or have to make an adjustment that I can see instead of something that is hidden that I have to go dig out, I think that sounds like a wonderful thing.

 

Stephen W.: I can imagine that that brings joy to your heart.

 

Tom Wheelwright: It totally does. Let me see if I've kind of got this right. I kind of look at blockchain as double entry accounting on steroids, that it's kind of like you've got this … so, you've got your entry, you got a debit and credit. So debits equal credits, that's all I did, double entry bookkeeping. And then on top of that, basically every transaction effectively audits every other transaction so that you can absolutely be sure that your books … let's say, just take it from a books and records standpoint, you'd never need to be audited. They would be automatically audited as you go. Am I understanding that right?

 

Stephen W.: Yeah, I believe that's a good explanation. Each transaction is verified and secure so that it becomes almost a triple entry accounting. If you're comparing it with someone else's books, then they have their books, you have your books, and then the blockchain keeps track of the actual transaction, so there's really no way to have confusion or muddled books. It's very, very helpful.

 

Tom Wheelwright: So it's almost like three dimensional accounting.

 

Stephen W.: Yeah.

 

Tom Wheelwright: Oh, I like that.

 

Stephen W.: That's how I like to look at it.

 

Tom Wheelwright: That's cool.

 

 

Stephen W.: So the two dimensional accounting came I think about 500 years ago and it was it allowed all the fortunes of the Medicis and all the Italian families. Then it hasn't changed that much in the last 500 years. But now it's poised to change dramatically.

 

Tom Wheelwright: So tell me, so what is a blockchain? Because what we hear mostly about blockchain is cryptocurrency, Bitcoin, Ethereum, et cetera. So how does even a crypto currency, how does it even fit within blockchain? Why does blockchain make those possible?

 

Stephen W.: So the concept of blockchain has actually been around since the 60s but it gained fame and more usability in 2008 when a person who remains anonymous invented cryptocurrency, invented Bitcoin, and he used blockchain as the accounting software below the Bitcoin, so it keeps track of every transaction of Bitcoin. Because it's a digital currency, there's nothing you can point to or hold onto, so it's very important to know where each Bitcoin is, when it's been sold, who has it to keep from duplicating the use of any particular Bitcoin. So blockchain became really well known as being the base layer for Bitcoin and other crypto currencies. But since then, people have realized how useful it might be for all kinds of other applications.

 

Tom Wheelwright: So again, give us some examples. Where is blockchain going to be used? Other than obviously my world it's going to be used because I think we're going to not have auditors anymore because in a financial world, if you're a bookkeeping, if every entry you make has this third verification basically that you're talking about, then there's really no need for an outside verification. In fact, an outside verification would be … you'd have challenges because you'd have human error. Whereas with the blockchain, you don't have that human error function or factor. But outside of pure accounting where makes all the sense in the world to me, I mean, where else is this going to be used? Where are we going to see this?

 

Stephen W.: So in asset management, in processing trades and settlement across borders and between people it can can be very useful. Processing insurance claims, insurance companies are very big into blockchain right now. It can help weed out fraudulent claims. It can catch people who are doing things fraudulently over and over. It's got all kinds of uses. Payments-

 

Tom Wheelwright: Hey.

 

Stephen W.: Yeah.

 

Tom Wheelwright: So, for example, sorry to cut you off, I want you to keep going, but you just triggered something for me. So one of the issues that we run into all the time, and I'm actually looking at and working on the beginnings of a book with a couple of coauthors about, which is white collar crime and internal fraud. Do you think the block chain then will be able to point that out?

 

Stephen W.: Well I think so. Blockchain is software. It's just like any software, it has no mind of its own and it has no sense of morality or anything like that. People often imbue it with a lot of sort of human qualities, but really it's just a cold software. So you would have to design it to do that. And I think that it could probably be very useful. I'm not certain of any application where it's being used for right now, but it seems like it definitely would work.

 

Tom Wheelwright: Interesting. Okay. So before I interrupted, what else? What else can it be used for besides the finance area?

 

Stephen W.: Okay. So for property, it's really interesting for real estate that if you use cryptocurrency and blockchain, you can … and also there's something called a non fungible token, which is not a monetary value. It is something that keeps track of a unit of value of a digital asset or a physical asset, so that say a piece of property could be divided up into a million different pieces and investors could buy one piece or 10 pieces or 100 pieces. It kind of makes it investing in large items like properties or very expensive Picasso paintings or things like that more accessible to the average person. I find that really interesting. There are all kinds of laws and regulations that make that difficult at the moment, but I think that's a very, very cool application.

 

Tom Wheelwright: Okay, so let me follow up on that, because our listeners are very interested in … a lot of our listeners do invest in real estate, and right now, typically there's really two ways that, well, there's three ways to invest in real estate, right? You can buy it outright yourself, right? You can buy it through a syndication, which you'd have to be an accredited investor to do that. So let's say you have a developer goes out, develops an apartment complex, and then they raise capital, and you're one of those people they raise capital from or there's the real estate investment trust, which is the same thing but public. Okay? And these are all partnerships, so that's what they are. They end up being partnerships, and all of the terms are in the operating agreement or the partnership.

 

Tom Wheelwright: So what I'm hearing you suggest is that wouldn't have to be a partnership, although there would still have to be rules as management, all that kind of stuff. But it could be more like a tenancy in common, which would be an undivided interest, but you could take that undivided interest to very small pieces and make it easy and maybe even make it a more efficient market. Am I following that?

 

Stephen W.: Yeah, I believe that that's correct. I'm not familiar with the tenancy in common concepts, but you definitely could subdivide the entire value of the property into many smaller bits and those can be traded through an online platform or any kind of platform without having to … if you're in a REIT or in another partnership, real estate partnership, there are a lot of lawyers involved with every decision that you make, every transfer of title. So with this, the lawyers are left out of the picture and you're trading basically representations of the assets, and decisions can also be made according to the participants in this blockchain. So I think that's another interesting development there.

 

Tom Wheelwright: That's really interesting. So just-

 

Stephen W.: For instance, you could take a valuable property. I live in Manhattan, you could take a $10 million house, you could sell half of that house or a third of that house to investors and you could keep the rest of yourself and you would still be in charge of that property, but you might get an infusion of money that would help you improve the property, which benefits everyone else who's involved. There are all kinds of applications for it.

 

Tom Wheelwright: So, just so everybody understands what tenancy in common is, tenancy common is basically an undivided interest in a piece of property. So let's say that you have that $10 million property in Manhattan, then rather than owning the bedroom as your share, you own in your case, a third of every single room and every single piece of that property. So you have an undivided interest in everything.

 

Stephen W.: Oh, I see. Yeah.

 

Tom Wheelwright: That's what a tenancy in common is, which it sounds like that's what you're talking about. One of the challenges we have in real estate is that in a limited partnership situation, which is typically the syndication, what happens is, is that some partners would like … when the property is sold, they'd like to buy a new property, and other partners don't. They'd like to take their cash. So, if you buy a new property, you can do what's called a 1031 or a Like-Kind Exchange, which is non-taxable. It makes the sale non taxable to you. However, everybody has to decide.

 

Tom Wheelwright: Now, in a tenancy in common situation you don't have that because you own your interest outright. You're not in a partnership. So what I'm hearing is, is that one of the potential uses for blockchain is to make that tenancy in common type of ownership actually feasible because it would actually, it would allow you to manage that and allow you to create a market for it. Am I hearing that right?

 

Stephen W.: Yeah. I believe that you are right. I can't attest to the legality or reality of that, but what I think this points out is that blockchain is opening up all sorts of new possibilities for different systems, different ways of creating value and dealing with value. And a lot of them are ahead of the curve so that people such as yourself, experts in accounting and legal experts have to really determine what's possible, what's legal, what laws need to be changed. It's such a dynamic area. I think that's part of what makes it so exciting.

 

Tom Wheelwright: So let me ask you a question about an area that's near and dear to my heart, which is taxes. We have a network of CPA firms and our expertise is taxes. And of course one of the issues for the government or any government is making sure that taxes are accurate and that's why they have auditors. Do you see that there's a possibility down the road that we would no longer need the IRS to come audit us because blockchain technology would take care of that?

 

Stephen W.: That's a really great question, and I feel that it's an idealistic, utopian sort of way of looking at it, and certainly it could be realized. The thing that I find is with a technology like blockchain and a society such as we have now, is that the people in power now aren't going to give up their power easy. And I think the IRS is one of the most powerful institutions we have. So I think instead of them collapsing and somehow blockchain being an independent way of certifying taxes, I think the IRS or any powerful organization faced with a disruption, they learn to adapt and retain as much control as possible. So you see that now with all of the banks and different financial institutions looking at the blockchain, creating their own cryptocurrencies, different things like that. I think that they're smart, they're adaptable, and they will remain, as much as I would like to see some of them disappear.

 

Tom Wheelwright: But all right, so let's bring this to a private situation. All right? So one of the things we're working on, is we're actually working on some tax planning technology using which will rely a lot on artificial intelligence for the AI because it has to learn, right? But here's my question, could we as tax preparers, if we had the right technology, could we actually make our tax returns audit proof so that, yes, the IRS may still have a desire to audit, but that if they did audit the blockchain would actually be able to show the IRS that, “Hey, everything's done right.” Do you see that as a possibility?

 

Stephen W.: Definitely. I definitely see that as a possibility.

 

Tom Wheelwright: That's cool.

 

Stephen W.: Yeah, I think that's certainly possible. And there's a really interesting technology that … so people build a lot of software applications on top of blockchain, and the Ethereum chain made possible this concept of something called smart contracts that are basically self-fulfilling contracts that are done automatically, like robotic contracts. And I think that those, they're basically, if this happens, then this happens, so you can make payments that way. All kinds of things can be fulfilled. I think those will have a big effect on accounting also.

 

Stephen W.: One area where I see a lot of cool things happening with that is in the energy utility area where all these new forms of energy are entering the grid and sometimes they're very small amounts from home solar systems and different things like that. Smart contracts on a blockchain could manage all of those transactions really easily.

 

Tom Wheelwright: Okay. Right now we're kind of on the very beginnings of blockchain, so do you see that the blockchain will be kind of creating websites so that back … you and I think are about same generation, and I remember when we first had the internet and we first heard about the internet and we first started seeing websites, I actually remember somebody calling me, a prospective client and they said, “Do you have a website?” And I said, “No.” They said, “Well, we don't need to talk, because that's my business, is the internet and I don't want to be working with an accountant who doesn't have a website.” So of course everybody has websites now. Right?

 

Stephen W.: Kind of rude.

 

Tom Wheelwright: And that's, it's fine. It's fine. [crosstalk 00:19:09] I have no issue with that. I mean, I didn't have a website so it was a totally fair statement. But my question is that, when we first developed the website, it was expensive because it was a lot of raw coding to get that website done. Then now though you can go online and you can create a website just by pick this, pick this, pick this, pick this and you've got a website in about an hour. You can have a decent looking website because it's all pre coded. It's kind of like Excel, right? Excel is all pre coded. So, do you see blockchain going that same direction where we're going to have like pre coding so that not the average person maybe, but certainly a business owner could easily use blockchain to make an impact in their business?

 

Stephen W.: Oh, definitely. I think it's already happening, and I think that's the goal and that's the need. The user interface with cryptocurrencies and blockchain has been pretty poor, and I think that's the big hurdle that needs to be fixed. But, I believe it is being fixed right now. So yeah, for sure. I think blockchain is getting easier and will be easier for people to use. So the question is, is do you need blockchain? And by the way, it's not just one blockchain. We can make as many blockchains as you want. So, we're not talking about one big system, it's all kinds of different blockchains that people have developed.

 

Tom Wheelwright: Right, for sure. It's just a closed system, right? I mean, that's all it is. Effectively it's a closed system so you can set your own closed system. I know that, people have told me that … I mean, I have friends who's done their own cryptocurrency. They said it takes five minutes. It's not that hard.

 

Stephen W.: Yeah, right. No, you can do that. Yeah.

 

Tom Wheelwright: So I am curious though-

 

Stephen W.: Can be an open system too also.

 

Tom Wheelwright: All right.

 

Stephen W.: Can expand it infinitely.

 

Tom Wheelwright: What do you mean by that?

 

Stephen W.: Well, if you create an open blockchain. I think that's the … There are private blockchains and public blockchains, and a public blockchain can be joined by anyone at any time and expand endlessly.

 

Tom Wheelwright: It would be more like a Wikipedia, basically.

 

Stephen W.: Yeah, but still secure, which is the fantastic part about it. That's where … actually, I think that that has huge possibilities for businesses to reach customers, for customers to communicate, for the supply chain to be expensive and more openness. But that takes a kind of … one of those things where you have to take a leap of faith and explore new possibilities.

 

Tom Wheelwright: So we've talked a lot about what blockchain is and what it does. Can you just take a couple of minutes to talk about what blockchain isn't and where people think it's like the end all be all, but there's actually things that it just doesn't make any sense with.

 

Stephen W.: Yeah. Well, so far I don't think it's a great system if you have a huge amount of transactions that need to be processed quickly, it's still not fast enough, such as you wouldn't really have a credit card running through blockchain that was effective, like a MasterCard. It just needs to process too much.

 

Tom Wheelwright: You need a centralized system, not a distributed system like blockchain would be.

 

Stephen W.: Yeah, I think so for now. Maybe in the future. Another thing is that blockchain, while it is immutable and information on there can't be changed, it does not determine if information is true or false. So there can be false information on a blockchain. It depends on who enters it, so there still had to be systems to determine, say if you're tracking organic cotton you still have to be certain that the cotton that enters the supply chain is organic. Now, once it's in the supply chain, there are ways to label the cotton with little pills that you put into the cotton bale or all kinds of different ways of marking goods, and those can be checked along the route of the supply chain. And you would always know whether they were still the same ones that entered the blockchain. But yeah, it's garbage in, garbage out, that definitely applies to blockchain. That's a big thing that people get pretty mixed up about. They think it has a way of determining truth, but it's doesn't. It doesn't even care, really.

 

Tom Wheelwright: Right. So it's not going to verify whether the entry was accurate in the first place, just that the entry was completed.

 

Stephen W.: Yes.

 

Tom Wheelwright: Okay. That's interesting. Can you think of any, a couple of practical uses or practical areas where an entrepreneur, an investor might really want to be thinking about either using blockchain or making sure that they watch for opportunities to use blockchain?

 

Stephen W.: Well, I think that a big area that's interesting for entrepreneurs with blockchain … well, there are two and they both involve tokens. One would be cryptocurrency, and using cryptocurrency as a way of rewarding behaviors in your marketplace so that instead of giving points or green stamps, you could use cryptocurrency for that. I think that's fascinating. Then this idea of non fungible tokens that track the value of a digital asset, so that it's being used quite a bit now in gaming. People might have clothing or skin tones or voice sounds or whatever that they can purchase through the game and they will own that individual digital asset so that it becomes curiously a rare digital asset.

 

Stephen W.: A lot of artwork is sold like this so that people will create a piece of artwork digitally and the original one that they create will be registered as a non fungible token, and all the copies of that can be made and sold, but that original one retains a value that is definitely worth something. There's definitely a market for all of this stuff, which is kind of interesting. Collectible digital assets. I think it's a big area.

 

Tom Wheelwright: That's fascinating. I have a niece who is a commercial artist and she does everything, and her art is all digital. She doesn't use paper. It's all digital art, so I'll definitely be a suggesting she listen to this podcast.

 

Stephen W.: Yeah, there's a very rapidly growing market place in digital artwork. I find that fascinating. I own some myself. I bought some myself.

 

Tom Wheelwright: Well, but that would be true then for copyrights, trademarks, and other intellectual property. Right? That's digital.

 

Stephen W.: Yeah, that's true. Yeah, no, it's really big on [crosstalk 00:26:10]-

 

Tom Wheelwright: So for example, you create a course, and one way to protect it is that people can only access it through your website, but you could technically then register that course digitally it sounds like. Then if you did that, then if you then sent out copies, you know that that was a copy.

 

Stephen W.: Right.

 

Tom Wheelwright: Interesting.

 

Stephen W.: Yeah, that's exactly it.

 

Tom Wheelwright: Okay. So I can see a lot of uses for that. I find that most businesses have, just for our listeners, most businesses have intellectual property that they don't recognize that it's their intellectual property and that they ought to be looking at protecting it. Particularly if you're a US business. I know that different countries have different rules about that. The US has pretty strong rules about what's protectable. This sounds like just another tool to protect basically your digital intellectual property.

 

Stephen W.: Yeah, it is definitely. I spoke a month ago in Scotland to the International Association of Copyright Organizations and they were very interested, and a lot of them were using blockchain for their work.

 

Tom Wheelwright: That's fascinating. Well, Stephen, this has been an enormous amount of information and I know that we're going to have to have more and more conversations about blockchain in this podcast. And we'd love to have you back. Will you come back and talk some more?

 

Stephen W.: Sure, yeah, yeah, I'd love to.

 

Tom Wheelwright: Awesome. So if you would, tell us how people could find you and learn more about what you're writing, what you're doing with blockchain.

 

Stephen W.: Yeah. If you go to StephenPWilliams.com you'll find everything you need to know.

 

Tom Wheelwright: And your book is Blockchain: The Next Everything.

 

Stephen W.: Yes. Blockchain: The Next Everything and it's available on Amazon and everywhere else. You can get audio books and Kindle, everything like that.

 

Tom Wheelwright: Awesome. I'm looking … that's my next book. I'm going to tell you right now, blockchain.

 

Stephen W.: And Stephen is spelled with a P-H, by the way. Stephen P. Williams, yeah.

 

Tom Wheelwright: Oh, there you go. Thank you. Thanks for clarifying. [crosstalk 00:28:25] There'll be looking for Stephen with a V and they're not going to be able to find you.

 

Stephen W.: Stephen Williams, you wouldn't believe it, so that's why I used Stephen P. Williams.

 

Tom Wheelwright: That's funny. That's awesome. Well, Stephen, thank you. Our listeners, this is one that you're going to want to listen to over and over again. Thank you very much for listening to The WealthAbility® Show. Please subscribe on iTunes and leave a five star review if you enjoyed the show. We do want to hear from you, so please also share your comments and your feedback, whether it's topic, whether it's guest, whether it's how we're doing the show. Please let us know. We are just always wanting to improve and get the show out to more people, because what we know is that the more we learn about what the future holds for us and what's possible, we're always going to make way more money and pay way less taxes. We'll see you next time.

 

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Announcer: You've been listening to The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes. To learn more go to wealthability.com.